27th June 2019 - AUD/USD consolidates below the 0.70 handle

Good Morning,

Market Headlines

- Trump appeared on Fox News as he said that it is possible to reach a trade deal with China, but that he is happy with where things are now. He said a deal may be reached with Xi at the G20 meeting which would avoid the need for further tariffs. He sunk the boot into Powell again saying the Fed should have Draghi instead of “our Fed person” whom he said is doing a bad job. He added that he has the right to demote or fire Powell.

- US durable goods orders fell by a larger than expected 1.3% in May led by weakness in the always volatile aircraft category. Beyond that the May data showed some encouraging resilience for business investment; core capital goods orders posted a healthier 0.4% gain in May while core capital goods shipments, a proxy for business investment rose 0.7% in the month and the previous month was revised up to show a 0.4% increase from 0.0%. The US advance trade good report widened more than expected in May to $74.5bn from $72.1bn

- FOMC member Daly said she’s uncomfortable with the low level of inflation, adding that the Fed may need to do more to get it back up to the 2% target.

- US 2yr treasury yields rose from 1.72% to 1.78%, 10yr yields from 2.00% to 2.05%. Markets are pricing 31bp of easing at the July meeting (was 33bp yesterday), with a total of four cuts priced by mid-2020.

- Australian 3yr government bond yields rose from 0.88% to 0.92%, 10yr yields from 1.28% to 1.34%. Markets are pricing a 75% chance of an RBA rate cut at the July meeting.

- Outperformer NZD similarly rose from 0.6660 to 0.6693 – a two-month high, the RBNZ yesterday not delivering the dovish surprise some had hoped for.

- AUD/NZD continued to probe the downside, to 1.0442 – the lowest since 2 April.

AUD Thoughts

AUD/USD is stalling below the 0.70 handle as eyes look forward to the G20.

AUD/USD is currently trading at 0.6986, up +0.39 on the session in New York following a slide in the greenback, giving back 50% of yesterday's gains. Yesterday, the USD rallied as the Fed tempered market easing expectations while risk appetite softened. The AUD/USD is however on tenterhooks given the sensitivity to shifts in Fed and trade expectations.

Markets are thinking twice following Powell's statement over the number of tariffs that are currently in place which are not large enough to (directly) have an economic impact on the US economy. However, they are impacting the confidence of financial and agricultural markets and indeed yesterday's Consumer Confidence was evident of that. Moreover, in the opinions gathered in the latest round of the Beige Book, ‘trade concerns’ were mentioned twice as often as in the previous round.

"The slew of Fed speak suggested that easing is likely, but the magnitude may differ relative to the market per any one meeting," market analysts explained.

"We agree and think the Fed is more likely to move in 25bp increments rather than 50bp. To this end, any reduction in implied bets for the July meeting are more positioning related rather than trend inducing USD squeezes. We remain focused on downside momentum in the weeks to come."

Meanwhile, the outcome of the highly anticipated G20 summit on June 28-29 in Japan will set the tone for the Aussie next week. "While a trade deal would be the best outcome, the probability of such a positive scenario materialising is relatively low. After all, the trade war is not about China buying more products from the US. The main objective for the US is to protect its global dominance by undermining China’s efforts to be a driving force in such crucial sectors as technology," market analysts argued.

Technical Outlook

We would allow for a near term correction higher and a run-up to the 55-day ma at 0.6984, 0.7022 the June peak and the April peak at 0.7069. Very near term we note the 13-count on the 60-minute chart and will tighten out stops. Further up resistance can be spotted at the 0.7207 February high

Event Risk Data Today

- NZ: the monthly business confidence survey (ANZ) has for some time been indicating slower economic growth. The May update ticked up slightly but remained in subdued territory.

- Euro Area: Jun European Commission surveys are expected to show the business climate indicator edging down to 0.29 from 0.30 and economic confidence down to 104.8 from 105.1. Jun German and Spanish CPI are out ahead of the Euro Area release tomorrow.

- US: Q1 GDP 3rd estimate is expected to revised up to a 3.2% annualised pace from 3.1%. May pending home sales data and the Jun Kansas City Fed index are released.